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February 27, 2012

Frontier Markets Left Behind in Latest Stock Market Rally

Despite the lag, managers like Mark Mobius like the sector’s potential

While small-cap stocks are benefiting significantly in the latest market rally, small market indexes are being left behind.

The best start to the year in two decades for stocks finds so-called frontier markets lacking consumer confidence and, as a result, severely underperforming.

“All nine of the world’s worst-performing equity indexes this year are in frontier countries, where the average stock market value of $30 billion is about 95% less than in emerging nations,” Bloomberg reports. “While the MSCI All-Country World Index (MXWD) jumped 11%, gauges in Bangladesh (DHAKA) and Sri Lanka sank at least 8% as interest rates increased. Nigeria’s stock index fell 1.1% after union strikes and attacks by Islamic militants. Frontier-nation stocks trade at the lowest valuations since at least 2008 versus emerging-market shares.”

“On a purely tactical basis, we have actually reduced exposure in frontier markets,” the news service quotes Antoine van Agtmael, who coined the term “emerging markets” in 1981 and now oversees about $7.1 billion as chairman of Ashmore EMM in Arlington, Va. “The larger, more liquid markets offered relatively more compelling investment opportunities.”

Frontier markets are typically defined as those that are peripheral emerging market countries in the early stages of the industrialization process. They include countries like Mongolia, Kazakhstan, Cambodia, Bangladesh, Nigeria, Ghana, Georgia and Estonia–nations that in many cases would not even be thought of as tourist destinations, let alone investment targets.

“The average annual gross domestic product for nations in the frontier index is $118 billion, compared with $994 billion for the emerging-market gauge,” according to Bloomberg and the International Monetary Fund. “Frontier countries have an average ranking of 74 in the World Bank’s ease of doing business index, compared with 70 for emerging markets.”

The $800 million Templeton Frontier Markets Fund–which was launched in October 2008 and is managed by famed emerging market investor Mark Mobius–has the greatest amount if its assets invested in African and Middle Eastern companies that are located in countries like Nigeria, South Africa, Kenya, Saudi Arabia, Syria and the United Arab Emirates.

Based on the idea of the “Two Cs–commodities and the consumer,” Mobius invests in companies that are strong producers of oil, iron ore, aluminum, copper, nickel and platinum, and he also scouts out the best opportunities in growing industries like retail, automobiles, finance, banking and telecommunications (the fund’s largest single holding is South African mobile telecom company, MTN Group).

The fund’s one-year total return, net of fees, is -18.87 as of Friday’s close.